The Rise of Chinese Fintech: Lessons for the United States · 2019-05-14 · The Rise of Chinese...
Transcript of The Rise of Chinese Fintech: Lessons for the United States · 2019-05-14 · The Rise of Chinese...
The Rise of Chinese Fintech: Lessons for the United States
Richman Center for Business, Law & Public Policy
Columbia Business School & Columbia Law School
February 25, 2019
/ Asset Management
John Mahoney
Managing Director
Co-Chairman, Financial Institutions Group
Goldman, Sachs & Co.
1
China in Context
Source: Euromonitor
Note: As of 2017
Country / Region: Population (mm)
Cambodia
China
Hong Kong
India
Indonesia
Japan
Thailand Philippines
South
Korea
Taiwan Vietnam
Australia
New Zealand
Malaysia
Singapore
Developed Emerging China
Population (mm)
1,383
1,307
264
127
105
96
69
51
32
25
24
16
7
6
5
China
India
Indonesia
Japan
Philippines
Vietnam
Thailand
South Korea
Malaysia
Australia
Taiwan
Cambodia
Hong Kong
Singapore
New Zealand
APAC
Population 4.1 bn 1.4 bn 0.3 bn
GDP per Capita $6.3K $8.7K $59.8K
Number of
Smartphones 2.2 bn 940 mm 248 mm
2
Cambodia
China
Hong Kong
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South KoreaTaiwan
Thailand
Vietnam
U.S.
AustraliaNew Zealand
0
1
2
3
4
5
6
7
8
9
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000
GD
P G
row
th (
%)
GDP per Capita (USD)
Disparate State of Development
Source: Euromonitor
Note: As of 2017
Developed Emerging
Cambodia
China
Hong Kong
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South KoreaTaiwan
Thailand
Vietnam
USA
AustraliaNew Zealand
0
1
2
3
4
5
6
7
8
9
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000
GD
P G
row
th (
%)
GDP per Capita (USD)
=US$2tn GDP
China
China GDP in
2035:
US$40tn
U.S. GDP in
2035:
US$38tn
0
10
20
30
40
50
2017 2027
GDP (US$ tn) China
US
2017 2027 2035
… 110,000
3
China
Hong Kong
Japan
South Korea
TaiwanSingapore
U.S.
Australia
Thailand
Malaysia
Philippines
Indonesia
Vietnam
India
(50)%
0%
50%
100%
150%
200%
250%
300%
0% 20% 40% 60% 80% 100% 120% 140% 160%
Cre
dit
Card
Pen
etr
ati
on
(%
)
Smartphone Penetration (%)
Opportunity for Technology Driven Financial Services
Source: Euromonitor, WCIS
Note: As of 2017
= 100 mm population
Developed Emerging China
Mobile / Digital Models Attack
Under-Served Markets
4
Major Demographic Shifts
Source: CIRC, Wind, Swiss Re
Rise of the Middle
Class
Urbanization
From Manufacturing
Towards Consumption
China GDP Per
Capita in 2035
~30k
48.3%57.3% 60.5%
2010 2017 2020
Urban Population (%)
6.1
12.1
15.4
2010 2017 2020
Disposable Income per Household (USD k)
1
44.1%
51.6%
2010 2017
Tertiary Industry as % of Total GDP (%)
5
China’s Strengths and Challenges
Source: Euromonitor, BIS, Bloomberg, Wind
Key Strengths Major Challenges
Large market ? Slowing growth
? Aging population Growing well in excess of
global average
? Severe environmental
issues Increasing personal wealth;
emerging middle class ? Uneven wealth
distribution
Transformation
— From low-end
manufacturing and
export oriented
industries...
— ...To New Economy and
consumption
? Significant increase in
leverage; particularly in
large corporate segment
? Capital flows and RMB
depreciation a point of
focus
GDP Debt / GDP
RMB / USD
Exchange Rate
Foreign Exchange
Reserves
GDP Growth
GDP per Capita
Balancing reform and de-risking with growth and stability
(US$ tn) (US$ 000)
(%) (US$ tn)
(%)
U.S. Global Average China
10.6
6.9
2.33.7
10 17 17 17
4.6 8.9
59.5
10.7
10 17 17 17
6.1
12.2
19.4
10 17 17
181.6
256.8 250.9 244.4
10 17 17 17
6.9
6.8
6.86.5
6.36.26.16.2
6.66.8
6.6
08 09 10 11 12 13 14 15 16 17 18
2.8 4.0
3.0 3.1
Dec-10
Aug-14
Dec-16
Dec-18
6
China Prominent Among Global Financial
Institutions
Source: Capital IQ
Note: Market data as of Jan 18, 2019
Market Cap of the World’s 25 Largest Listed Financial Institutions
Canada US China Europe Australia India Brazil
503
348
283 278
229213
183169 164
149 148
107 107 101 100 93 90 89 84 85 81 81 80 77 74
Be
rkshir
e H
ath
aw
ay
JP
M
BO
A
ICB
C
We
lls F
arg
o
CC
B
AB
C
HS
BC
Pin
g A
n
Citig
roup
BO
C
RB
C
AIA
CM
B
TD
Ba
nk
CB
A
Itaú
Alli
anz
Chin
a L
ife
Am
eri
ca
n E
xp
ress
HD
FC
Ba
nk
U.S
. B
an
corp
Ba
nco
San
tand
er
GS
MS
7
96
84
64
58
57
CITIC
Haitong
Guotai Junan
Huatai
GFS
8%
7%
5%
5%
5%
80
58
30
27
18
China Life
Ping An Life
Anbang Life
CPIC Life
Taikang
20%
14%
7%
7%
4%
196
94
92
88
81
99%
56%
78%
76%
49%
Tianhong
E-Fund
CCB Principal
ICBC-CS
Bosera
10%
5%
5%
5%
4%
Traditional Financial Services Sectors are
Concentrated with High Degree of State Influence
Banking – Top 5 by Assets
Securities – Top 5 by Assets
Insurance – Top 5 by GWP
Investment Management – Top 5 by AUM
Source: Wind, CBIRC
Note: CNY / USD = 6.85. Banking data as of Jun 30, 2018. Insurance GWP and market share based on life insurance, as of 2017. Securities data as of Jun 30, 2018. Investment
management data as of Dec 31, 2018.
(US$ bn)
JPM Total Assets: 2,590 MetLife GWP: 40
BlackRock AUM: 5,976 GS Total Assets: 969
SOE Non-SOE Market share Top company in U.S. Money market funds Personal consumer loan (excl. mortgages)
(US$ bn) (US$ bn)
(US$ bn)
3,986
3,329
3,200
2,963
1,361
ICBC
CCB
ABC
BOC
PSBC
14%
12%
11%
10%
5%
$33
$28
$23
$57
$40
8
Regulatory Reforms Aimed at De-risking and
Opening Up the Financial Services Industry
De-risking
Opening Up
Formation of Financial Stability Committee under control of the State Council and
Merger of CBRC and CIRC to CBIRC
Various measures to reduce systemic risk
— Reigning in shadow banking
— Corporate deleveraging
Tightening capital requirements for financial institutions and encouraging broader range
of capital instruments
Allow for broader foreign participation across financial services
— Securities, Insurance and Fund Management: foreign ownership limit increased to
51%, and removed entirely in 2021
— Banking: foreign ownership limit removed
Emphasized by China leadership
9
China’s Fintech Landscape
Fundamentals Focus Sectors Players
Payments
Credit / Lending
Wealth
Management
Insurance
Digital Banking
Vertical Search
SaaS
Health Tech
Major Demographic
Shifts
Large Unpenetrated
Population
Smartphone Penetration
Start-Ups
Incumbents
Internet Giants
10
5%
7%
China US
23%
8%
China US
Large Unpenetrated Population Credit, Payments, Insurance, Wealth Management
Source: Passport, Swiss Re Institute, Worldpay, WCIS
Premiums as a % of GDP in 2017 2012-2017 Cash deposits (savings) as % of GDP
Credit: Lending Penetration in China
Insurance: Penetration as a % of GDP Wealth Management: Savings Rate
U.S.
Prime Sub-prime Near-
prime
~42%
~5-7%
loss rate
~33% ~25%
(Super) Prime Lower & Sub-prime Prime & Near-prime
~25%
PBoC Data
Base / Credit
Card Holders
~1.5% loss
rate
Data / Credit
Experience
Available for
“Super Prime”
Population Only
Significant
“Prime” /
“Near Prime”
Market
Opportunity
~500 mm
population
Payments: China 3rd Party TPV
$204
$555
$2,161
$1,571
$1,882
$2,264
2013 2015 2017
China Independent 3rd Party TPV US Personal Credit Card TPV
US$ bn
11
0%
1%
2%
3%
4%
5%
70%
79%
China US
Power of Technology Significant Smartphone / E-commerce Penetration
Source: Passport
Smartphone Penetration E-Commerce Growth
As of 2017 E-Commerce as % of Nominal GDP
12
$161
$511
2017 2022E
Balance of Power
Opportunity Internet
Giants Incumbents Start-Ups Commentary
Payments Mobile / Online Offline Limited Highly concentrated
between Ant and Tencent
Credit /
Lending
Enablement /
Distribution Super Prime
Prime /
Near-Prime
Significant
start-up activity
Wealth
Management
/ Asset
Management
Enablement /
Distribution
Manufacturing /
Distribution
Manufacturing /
Distribution Market developing
Insurance Distribution Manufacturing Varied Incumbents well-
positioned
$2.2
$8.3
2017 2021E
$0.5
$2.1
2017 2022E
$37
$174
2015 2020E
Who Are Beneficiaries of the Fintech Opportunities?
Independent 3rd Party Payments, US$ tn
Loan Balance of Online Consumer Finance, US$ bn
AUM of Online Wealth Management, US$ tn
Insuretech – GWP, US$ bn
Source: Oliver Wyman, GS Research, public filings
13
Internet Giants’ Fintech Presence is Broad and
Deep
Value of Fintech
Business (US$ bn) $41
$1502 $1153 $204 595
# of Users 665 mm6 900 mm7
1,083 mm8 305 mm9
247 mm10
Payments
Credit / Lending
Wealth
Management /
Asset
Management
Insurance
Digital Banking
Vertical Search
SaaS
Health Tech
Baidu Finance
Cloud
Ant Financial Cloud
Zhima Credit
Ping An Cloud Qianhai Credit Service
One Connect Good Doctor
Health Connect
Tencent Cloud
JD Cloud
Bai An Insurance
JV with Allianz and
Hillhouse (pending
approval)
14% Zhong An stake
51% stake
10% Zhong An stake
10% stake
30% Allianz China
Stake
20% Aviva HK stake
Baidu
Wealth
Management
Yu’e Bao
Tianhong
(China’s largest mutual fund) Lufax Licaitong
JD Wealth Management
Xiaojinku
Baidu Wallet
Alipay
(#1 mobile payments
platform)
Ping An
E-wallet
WeChat Pay
QQ Wallet
(#2 mobile payments platform)
JD Pay
Jincai.JD
Baidu Finance
aiBank MYbank Lufax WeBank
JD Finance
Baitiao Xiaobai Credit
Note: Market data as of Jan 18, 2019; 1 Valuation of Du Xiao Man; 2 Valuation of Ant Financial; 3 Valuation of Tencent Financial Services; 4 Valuation of JD Finance; 5 Valuation of
Lufax, One Connect, Ping An HealthKonnect and Ping An Good Doctor; 6 Mobile search MAU; 7 Annual active users; 8 MAU of Weixin and WeChat; 9 Annual active customer
accounts; 10 Annual active Internet users
Internet Giants
(Market Cap.)
Baidu – Search,
US$91 bn
Alibaba –
E-commerce,
US$535 bn
Tencent – Social
media / Gaming,
US$499 bn
JD – E-commerce,
US$54 bn
Ping An – Financial
conglomerate,
US$178 bn
Leading
Life and P&C Insurance
Lufax: 38
OC: 7.5
Doctor: 4.9
HK: 8.8
14
Selected Start-Ups
Payments
Credit / Lending
Wealth
Management /
Asset
Management
Insurance
Digital Banking
Vertical Search
SaaS
Health Tech
Start-Ups Gaining Foothold
100 Credit
Samoyed 51 Credit 360 Finance
Auto
Credit
Card
POS
Offline
Dianrong Dashu
Xiaoying
SME
Cash
Loans Yirendai
Lufax
Wacai Suishou Lufax
Huifu / China
PNR
Uxin
Cheche Tech
Yusys Technologies
Lianlian Pay
Doubao
15
Build–out own consumer finance
business / increase tolerance for
(somewhat) lower credit quality
Separately licensed, fast growing
consumer finance business
Affluent focused mobile offering
Largest bank with predominant
consumer banking focus
Increasing cooperation between
banks and start-ups for more
efficient access to mass
consumer finance market
Enablement platform for rural and
regional banks
White-label consumer loan app
Strategic tie-ups between banks
and Internet Giants
Launch of digital bank
ABC Financial Branch
Unsecured lending product
Credit card collection
Mobile payment
BOC / Tencent Fintech Lab
Comprehensive technology
support
Incumbents’ Reactions Tentative So Far
Payments Historical focus on offline
Credit /
Lending
Slow response
But still an important role to
play
Wealth
Management /
Asset
Management
Significant industry
structural adjustment
Not a major focus (yet) on
mass market
Potential long-term
opportunity
Insurance
Increasing focus on mobile /
online distribution
Selected tie-ups between
insurers and technology
players
Product complexity favors
incumbents
Focus on Online Distribution
Major Investments in
Technology Tie-Ups Insurers / Technology
/ /
/ /
/
Ping An
One Connect
16
Slow but Overall Sensible Approach to Fintech
Regulation
Regulators playing catch-up
Broad guidelines issued in Summer 2015: “Introductory Framework on Promoting Healthy
Development of Internet Finance”
Implementation across segments taking time
— Involves close discussion between regulators and participants
— Seeks balance between support and risk mitigation
— Requires alignment of interpretation across local regulators
May have underestimated magnitude and complexity of task
Willingness to create a healthy environment in which responsible Fintech players can play a
meaningful role in financial services
Tightening of central oversight as opposed to mostly regional; direct involvement of PBOC,
CBIRC and CSRC
Primary challenges are:
— Sufficiency of resources
— Forcing out marginal players while maintaining stability
Direction
To Date
Outlook
17
Early Comparisons of Relative Position
Internet Giants Start-Ups Incumbents
1 Assuming flat growth from 2015 to 2018; 2 Number of annual active users during the twelve months ended November 30, 2018; 3 MAU of Weixin and WeChat as of 3Q2018; 4
Number of registered users as of 2017 year end; 5 Number of customers as of 2017 year end.
# of Customers (mm) Last 2 Years Growth in Customers
900
1,083
Ant Tencent
~50.0% ~21.8%
6284
Qudian Jianpu
2.8x 7.8x
573
380
ICBC CCB
14.3% 10.1%1
2 3 4 4 5 5
18
China Payments Increasingly Dominated by Non-Bank
Platforms By the Numbers: Western vs. China Payments Market
Source: iResearch, Nilson Report, Passport, GS Research; USD/RMB=6.85.
China 3rd Party TPV Catching up with US Credit Card TPV Mobile 3rd Party TPV Market Share (2017)
Other includes PingAn, JD Pay, China
UnionPay, China PnR and others
Average merchant fees
as % of TPV
Payment Fees by Peer
2.5 – 3.0%
1.5 – 2.25%
~0.6%
Square PayPal AmericanExpress
V / MA Ant / TenPay
2.75 – 3.5%2.5 – 3.0%
$204
$555
$2,161
$1,571
$1,882
$2,264
2013 2015 2017
China Independent 3rd Party TPV US Personal Credit Card TPV
US$ bn
Other8%
Alipay54%
Tenpay38%
19
Payments is the Backbone to Ant Financial’s and
Tencent’s Financial Service Business
Source: Company website, company presentation, iResearch and newsrun
Note: Total payment volume from 2017 Analysys report. TPV includes network payment, prepaid card, bank card receipt and other payment services recognized by the People's Bank of China by non-
financial institutions. Third-party payment platform does not involve the ownership of funds, but only money transfer. Ant’s number of SME borrowers, consumer finance users and Sesame Credit (credit
bureau), wealth management and insurance users as of Mar 31, 2017. For payment business, 900 mm annual active global users were directly served by Ant during the 12 months ended Nov 30, 2018,
and 120 mm global users were served by Ant’s strategic local partners during the 12 months ended Mar 31, 2017; Ant’s wealth management users represent cumulative users; Ant served 11 mm small
businesses for unsecured lending; consumer finance and insurance users represent annual active users; and credit bureau users represent activated users. Tencent reported 1,083 mm+ mobile payment
MAU as of Sep 30, 2018. Tencent’s consumer finance users (refers to cumulative users of WeBank) and wealth management users from newsrun.
/
Mobile
Payment
Volume
Mobile
Payment
Volume
Local
Partners
Ant
Financial
$6.6 tr
$7.1 tr 1,083 mm+
100 mm+98 mm+
20K+ 12.6 mm+ 0
To
tal P
aym
en
tV
olu
me
We
hca
t P
ay
MA
U
We
alth
Ma
nag
em
ent
Use
rs
Co
nsum
er
Fin
ance
Users
SM
EB
orr
ow
ers
Insu
ran
ce
Use
rs
Cre
dit B
ure
au
Use
rs
$9.2 tr900 mm
120 mm
$10.3 tr
1,020 mm
600 mm
100 mm
11 mm
392 mm
257 mm
To
tal P
aym
en
tV
olu
me
Alip
ay A
nnu
al
Active
Use
rs
We
alth
Ma
nag
em
ent
Use
rs
Co
nsu
me
rF
ina
nce
Use
rs
SM
EB
orr
ow
ers
Insu
ran
ce
Use
rs
Cre
dit B
ure
au
Use
rs
20
Significant Investment in Next Generation
Technologies by Alibaba and Tencent
Source: Filings, News; USD / RMB = 6.85.
1. FY2018 for Alibaba, FY2017 for Tencent; 2. Spending on acquisitions, business combinations and private placements. Estimated numbers and information subject to public disclosure. Excluded
acquisitions as investor groups where individual investment amount was not disclosed. FY2018 for Alibaba, FY2017 for Tencent
Top Technology Priorities
Annual Investment
Spend2
US$2.5 bn
US$3.6 bn
Annual R&D Spend1
US$6.3 bn+
US$10.6 bn+ Cloud Biometrics AI VR/AR Blockchain
Cloud Big Data AI Blockchain Payments
21
305
209
150
115107
53
38 35 30
25 21 20
Visa MasterCard
AntFinancial
TencentFinancialServices
PayPal Fiserv Lufax FIS Square Worldpay Wirecard JDFinance
US China
206
151
China US
China Fintech in the Global Context
Source: CB Insights (US unicorns), IT Orange (China Unicorns); market data as of Jan 18, 2019; USD/RMB = 6.85
1. Pro forma market cap of Fiserv post acquisition of First Data
Largest Fintech Companies Globally
(Market Cap / Indicated Value, US$ bn)
Number of Unicorns across Industries
1